EXECUTIVE FORUM FOCUS:
Are Clients Entitled To Interest When Receiving Their Security Deposit Or Retainer Refund?

It’s a good question that pops up every so often in our market and association, usually after an exiting client is disappointed or threatens legal action when it finds out that it won’t be getting back anything more than what it originally laid out. But how solid, legal or prevalent is this ‘no interest’ practice and policy? Recently, this question was raised for review, and here’s the consensus of from senior executives of representing some of our local market’s top Operators: (article link)

A few key local senior executives of WANY were canvased recently on their policies and practices regarding whether clients are required to provide interest when issuing security deposit/retainer refund with interest, and here is what they had to say:

Operators are on pretty solid ground for not having to provide interest for the simple reason that we do not only rent out defined cellular spaces in a strict real estate sense, but in fact provide extended space uses and accesses, plus services that we charge for that is way beyond just access to a limited, defined space -- which is what distinguishes what we do from, let’s say, the strictly real estate transaction of renting an unfurnished apartment.A rReal estate solution is just a portion of what we offer and do for a living.

We Serviced Workspace Providers (BCs, Coworking Spaces and CO-BC Hybrids) provide outsourced staff, general services, furniture, equipment, telecommunications, tons of common space usage, a managed office, etc... way beyond the limits of a rented out box -- which we give our clients license to use and enjoy. Most of us provide a corresponding, defined License Agreement (as opposed to a lease or sublease which are contracts that govern traditional real estate rentals) which spells out the features and limits of the arrangement we extend to our clients. The License Agreement that allows them a bite of the whole pie ... an office is just a part of what they get for their money.  

Hence, to be safe, it is recommended that our agreements (and approach) steer away from anything that hints of real estate — such as not referring to “leases”, “subleases” and “security deposits” — and instead go in the direction of providing a “space usage and services retainer” as your governing document, contract and agreement. We are a ‘serviced workspace’, much the way that a hotel room is not a dwelling, but a serviced sleeping space and thus charges for much more than just 1/365th of a year per night as a real estate (room rental) charge based on the size of the room. Again: hotels are not just real estate, and serviced workspaces aren’t just R.E. either, which is why we charge more than average per square foot charges for usage – just like hotels don’t, nor do they have to.

Ed Carroll of NYC Office Suites says: “Currently, to my knowledge, the segregated account is only for tenant/landlord agreements in NYC, not licensee’s”, while Hayim Grant of Corporate Suites adds: “Our contracts call it a services retainer -- more like an advanced payment”, and Work Better’s Harsh Mehta concurs, with: “We call it a retainer and our agreement specifically states that these funds won't be segregated” -- which is the way that all Operators are encouraged handle it.   

The final comment offered in this issue was that it’s never good to have a client leave on sour terms (they’re potentially the best referral sources for added future business) so, after explaining to a client that distinctions on why we don’t refund retainers or deposits like they do in other traditional real estate situations, it still might be a good idea to come up with a way for the exiting client to walk away in good spirits, feeling acknowledged and appreciated, and thus more apt to refer future prospects (perhaps with a discount coupon that they can issue to a friend that might be looking for workspace that is comparable to what the client expected to have received if interest was to have been applicable.

Maintaining a good, high hospitality brand for our companies and industry should always be our North Star, especially when they’re heading out the door.